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politics and financial stability August 23, 2019

Posted by Bradley in : financial regulation , trackback

Regulators in the US are relaxing regulatory constraints on financial institutions introduced in response to the financial crisis, although recent episodes of volatility in financial markets and suggestions that recessions are underway or developing raise some questions about whether this makes sense.  It is not clear that the post crisis regulatory changes had a negative effect on SME financing, for example (the Financial Stability Board suggested this in the summer,  and asked for reactions).  And, in addition to purely economic considerations there are political developments which raise questions about risks to financial stability, such as the concerns banks in Hong Kong have raised about protests there.

Jerome Powell today had some words about financial stability:

At the end of the day, we cannot prevent people from finding ways to take excessive financial risks. But we can work to make sure that they bear the costs of their decisions, and that the financial system as a whole continues to function effectively. Since the crisis, Congress, the Fed, and other regulatory authorities here and around the world have taken substantial steps to achieve these goals. Banks and other key institutions have  significantly more capital and more stable funding than before the crisis. …  We have not seen unsustainable borrowing, financial booms, or other excesses of the sort that occurred at times during the Great Moderation, and I continue to judge overall financial stability risks to be moderate. But we remain vigilant.

However, he also pointed out that “fitting trade policy uncertainty” into the Fed’s analysis was “a new challenge.” Recent events are complex:

The three weeks since our July FOMC meeting have been eventful, beginning with the announcement of new tariffs on imports from China. We have seen further evidence of a global slowdown, notably in Germany and China. Geopolitical events have been much in the news, including the growing possibility of a hard Brexit, rising tensions in Hong Kong, and the dissolution of the Italian government. Financial markets have reacted strongly to this complex, turbulent picture. Equity markets have been volatile. Longterm bond rates around the world have moved down sharply to near post-crisis lows. Meanwhile, the U.S. economy has continued to perform well overall, driven by consumer spending. Job creation has slowed from last year’s pace but is still above overall labor force growth. Inflation seems to be moving up closer to 2 percent.

It’s not clear to me that at this point suggesting to financial institutions that they should be taking on more risk makes sense.


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